The market volume touched its lowest mark in
8 months on Monday as most of the investors were inclined to subscribe
for PPL shares, which pulled the index down by 0.17%. Even the tariff
re-balancing news at PTCL could not create any excitement at the KSE.
Tuesday was positive, with market was hit with the rumors regarding PC
considering inviting fresh EOIs for PSO privatization. The board meeting
dates announcements triggered a positive rally in the market on
Wednesday (0.95% up) where higher dividend

expectations from oil, gas and telecom
companies attracted institutional buying. The rally proved short lived
owing to: (I) the institutions
were on the sidelines and (II) retailers
capacity to play the market was substantially affected after
depositing most of their liquid funds for the PPL IPO.

OUTLOOK FOR THE FUTURE

The next week is full of corporate result
announcements. Interestingly, four of the active sectors, oil,
fertilizer, textiles and auto will see major result announcements. We
are of the opinion that this week will set the tone of the market
direction for next few weeks. The week will start with textile sector
results where three of the important companies, Nishat Chunian, KTM and
Gadoon will be releasing their 9 monthly results. Engro, the premier
company within fertilizer sector will be the next one to come with
results. We feel that this announcement will also give a hint about
FFC's results. Auto sector will see Honda to come up with its results
while PSO will announce its results on the 29th. Two result
announcements have the capacity to become turbo boosters for the market;
PSO and FFC. Both the companies are currently shrouded with the bonus
rumors. Logically, there is little sense for such rumors, but our
investors should not rule out any surprises as both the managements have
the capacity to give surprises. We expect the trading volumes to pick
up. Though retailers may not become very active in the market owing to
stuck up money with PPL subscriptions, institutional activity is likely
to be revived in the days to come. PPL subscription numbers have also
the ability to become a trigger for the market. We suggest investors to
stay tune to the market. KSE 100 Index is likely to move towards its
recent highs of 5500+.

FUNDAMENTAL CHANGES

The major developments this week were:

•Bosicor began Commercial Production from Monday.

•The Iraq Business Council (IBC) has identified 500
industrial and infrastructure projects for investors where Abu Dhabi
would be used as a hub for the reconstruction activities in Iraq.

•The State Bank intended to auction PkR70bn worth
of 6-month T-bills on Wednesday.

•The government is taking various steps to increase
cotton production to 15mn bales by 2010.

•The auction for Allied Bank Limited was held on
Friday, 23rd July. Five pre-qualified bidders namely, Pak Kuwait
Investment Company, Askari Bank, Jahangir Siddiqui Investment Bank, NIB/Temasic
and Ibrahim Group participated in the bidding. Ibrahim Group won the
bid.

•As per sources, Pakistan's FY05 exports target has
been revised upwards to US$13.7bn, 11% higher than the US$12.3bn
attained during FY04, on the insistence of the President and the Prime
Minister during a presentation of the proposed Trade Policy for FY05.

•The Parliamentary committee on water Resources on
Tuesday failed to achieve a consensus on large dams where Sindh and NWFP
rejected Kalabagh Dam.

•The State Bank issued the monetary policy for the
first half of the current fiscal year on Wednesday.

•The State Bank auctioned PkR66.9bn worth of
6-month T-bills on Wednesday against a target of PkR70bn and total bids
of PkR97.8bn. The central bank raised the cut-off yield on the T-bills
by 35bps from 2.23 percent to 2.58 percent.

•HBFC has revised its Debt-equity ratio to 80:20
from 50:50 for its 'Aasan Ghar' scheme to facilitate borrowers.

•Chanda oil & gas field has started its
commercial operations.

•The latest report from International Monetary Fund
(IMF) re-affirmed the government claim of achieving more than 6% GDP
growth in FY05.

•Standards & Poors maintained its positive
outlook for Pakistan in its recently released regional report.

•The construction proposal of controversial
Kalabagh Dam came under severe criticism in the National Assembly when a
few of the treasury members issued supporting statements for this
proposal.

The Government of Pakistan is offering a total of
102.5mn shares of Pakistan Petroleum Limited under its divestment
program. At an offer price of PkR55/share, PPL's valuations are very
attractive and are at a significant discount to the valuation multiples
of the industry. PPL's net profits are likely to grow at a CAGR of 16%
over FY04-08, driven primarily by the increase in gas prices under the
revised pricing mechanism announced for PPL. Our price objective for PPL
is PkR94/share and we recommend investors to subscribe to the issue.

ATTRACTIVE VALUATIONS

PPL's valuations at the offer price are highly
attractive. The stock is being offered at 6.7X FY04E earnings, 3.8x EV/EBITDA,
and at a dividend yield of 7.3%, all signifying a significant discount
to the peer group as well as the market. The stock is also at a steep
discount to its peers on an EV/boe basis. However, we believe that the
stock is likely to continue trading at a discount to its peers on
account of the lower gas selling price compared to other E&P
companies listed at the KSE. Our DCF based price objective for the stock
is PkR94/share. The surge in the stock price of PPL during provisional t
rading however, has brought its valuation multiples at par to its peer
group. We believe that the surge in the stock price during provisional
trading is not abnormal, as investors generally do not have to incur any
significant costs. Post listing on the ready counter however, we expect
PPL to continue to enjoy a liquidity premium.

It is difficult to assign a premium due to the
peculiarly illiquid nature of the stock (free float 7.5%). However, the
maximum liquidity premium that can be justified to any extent is where
the stock valuation comes at par with OGDCL's EV/boe value basis. On the
other hand, a discount is also necessary for PPL, the quantum of which
will remain dependent upon the investors' appetite for the shares and
the perception about the company's declining reserves.

GAS PRICES — DISMANTLING OF THE GPA

With the dismantling of the Gas Price Agreement (GPA)
1982, PPL's profitability is likely to soar even if crude oil prices
remain stable and production remains stagnant. The government has put in
place a revised gas pricing mechanism for the pricing of gas from the
Sui and Kandhkot gas fields, which will be completely implemented by
FY08. Under the mechanism, the prices of gas from the two fields will be
increased to a level of 50% of the prices under the Petroleum Policy
2001. Currently, the gas prices of Sui and Kandhkot fields are the
lowest among all the fields. Although this anomaly is not likely to be
removed completely, we believe that it represents a substantial
improvement over the previous pricing formula.

EXPLORATION — REVITALIZED FOCUS

The GPA 1982 was a major hindrance to the growth of
the reserve base of the company, as it did not provide any incentive for
exploration. Although PPL was among the first companies to initiate oil
and gas exploration activities in Pakistan, its efforts to explore oil
and gas in the country completely died down during the period of
1960-1990. The company was mainly concentrating on production from its
existing fields and no major additions to its reserves were being made.
With the new pricing mechanism in place, PPL is aggressively exploring
oil and gas in the country.

PRODUCTION — SUBSTITUTING DECLINE IN SUI

With Sui accounting for almost 73% of the total gas
production of Pakistan Petroleum Limited, there has been a concern over
the company's ability to maintain growth in production. However,
increased production from Sawan, Miano, Kandhkot and Qadirpur are likely
to more than compensate for the decline in production coming from Sui.
In addition, the company is also making further exploration efforts at
Sui, where the company has encountered indications of additional reserve
prospects at deeper levels of the field. Tal block is also on the verge
of commerciality, which is likely to be a good addition to the overall
producing fields of PPL.

TOP STORY

PAKISTAN TELECOM — TARIFF CUTS

The much awaited tariff cuts have finally been
announced by the telecom ministry. The tariff adjustments include a
drastic reduction in outgoing international calls, 25-29% reduction in
DLD calls, free local calls from midnight to early morning, reduction in
bandwidth charges and reduction in the urban connection charges.

We do not expect any significant negative
implications for PTCL. Our view is based on: (I) the reduction in ILD
call rates would not have much of an affect on PTCL owing to its
insignificance in total revenues and lower TAR levels; (II) the
reduction in DLD will fuel the growth as it has been doing for the past
many years, however, the growth is unlikely to mitigate the full impact
of this reduction owing to the higher quantum of tariff cuts; (III)
reduction in urban connection charges will be set off against volumetric
gains. The market should react positively as the announced package is
somewhat better than market expectations. We maintain our earlier Buy
recommendation on the stock with our target price of PkR50 per share.
This fair value has potential for further upward revision, as the 4QFY04
traffic data is significantly higher than our earlier estimates. And we
are in the process of revising our earning estimates for the company,
which will be available next week. PTCL also stands out taller than
everybody else in terms of dividend yield.

CREDIT PLAN 2004-05

The National Credit Consultative Council proposed the
Credit Plan for FY2004-05 last Saturday. The plan targets monetary
expansion of 11.6 percent, or PkR280bn. The growth is based on Net
Foreign Asset growth of PkR30bn and Net Domestic Asset growth of
PkR250bn. The main driver of growth is anticipated to be private sector
credit, which is predicted to reach PkR200bn. The government also
intends to borrow PkR50bn, while the Agriculture Credit Advisory
Committee has suggested a target of PkR85bn for the agri sector. We feel
that monetary expansion in FY05 will exceed the target set in the credit
plan.

FERTILIZER DATA RELEASED

The fertilizer sector, which has been on the
sidelines for quite some time, is expected to become exciting again. The
latest data release by the National Fertilizer Development Centre is
well above market expectations and is a clear indicator that the
fertilizer sector will not stay behind in terms of growth vs the other
industrial sectors. We are of the opinion that this sector generally
provides a defensive feature within the commodity sector with a low
beta, high yield and growths marginally below the market. FFC is our top
pick in the sector whereas we feel that Engro is fairly priced at this
level.

MONETARY POLICY — 1HFY05

The State Bank issued the monetary policy for the
first half of the current fiscal year on Wednesday. The SBP indicated
that it expects inflationary pressure to persist during the coming
months, mainly as a result of the last two years' monetary expansion. It
thus intends to continue its policy of shifting towards a "measured
tightening" of monetary policy by gradually raising interest rates.
The central bank also highlighted a few threats for the current fiscal
year, particularly, the need to match foreign interest rate hikes, an
increase in asset prices and worsening of the trade balance. On the
brighter side, it expects the Fiscal deficit to remain at 4 percent of
GDP, a lowering of inflationary pressure from capital inflows and a
reduction in cotton prices during the coming year. Additionally, the
Bank foresees decreased pressure on private sector credit due to reduced
capital expenditure, particularly by the textile sector. Moreover, the
SBP has again indicated that it does not intend to pursue an aggressive
tightening of the monetary policy to prevent stifling of economic
growth.